Global equity markets declined over the week ended August 18 based on evolving concerns about weakness in China’s economic indicators and the outlook for continued high global interest rates. The S&P/TSX Composite Index declined with weakness in the Information Technology and Materials sectors. U.S. equities, as measured by the MSCI USA Index, also finished the week lower. Yields on 10-year government bonds in Canada and the U.S. rose as the U.S. Federal Reserve Board (“Fed”) minutes released this week suggested that the central bank was not finished raising interest rates. Both oil and gold prices declined.
Canada’s inflation rate moves up
Canada’s annual inflation rate ticked higher to 3.3% in July, from 2.8% in June. According to Statistics Canada, the increase was partially due to a relatively smaller drop in gasoline prices.
However, one of the largest ongoing contributors to higher inflation has been the record increase in mortgage costs. Food prices rose by 8.5% in July, slowing from the 9.1% increase in June.
Despite the increase in inflation, the Bank of Canada (“BoC”) appears poised to hold steady at its next meeting on September 6.
Ahead of the meeting, the BoC will pay particular attention to core inflation measures, which have been declining.
Forecasts from the BoC in July showed inflation staying around 3% over the next 12 months before trending down to 2% by 2025.
U.S. retail sales advance
Retail sales in the U.S. rose by 0.7%, representing a fourth consecutive monthly increase, according to the Department of Commerce.
Economists had expected only a 0.4% rise, so the results pointed to the resilience of the U.S. economy.
Although pandemic-related savings are becoming depleted, U.S. consumers continued to show their relative strength, helping push economic activity higher.
Spending on e-commerce channels was a key contributor to retail sales in July, driven by Amazon’s Prime Day.
The data led to concerns from investors that the Fed could keep interest rates higher for longer.
U.K. energy costs moderate
The U.K. inflation rate softened to 6.8% in July, on an annual basis, the lowest level since early 2022, in response to lower energy costs.
The core inflation rate was unchanged at 6.9% in July, which is likely to keep the Bank of England on a path of raising interest rates.
In Europe, according to Eurostat, reduced energy prices also helped to lower consumer price inflation to 5.3% in July.
The cost of services rose to 5.6% in July, which could be a concern for the European Central Bank as higher prices for services can be driven by higher wages in the tight jobs market.
China’s economic indicators lose momentum
China’s domestic demand continued to moderate. Retail sales in China rose by 2.5% year-over-year in July, down from the 3.1% increase in the previous month, missing expectations.
This marked the third straight monthly slowdown in retail sales growth.
Industrial production climbed by 3.7% in July, also down from the previous month’s increase.
This adds to weakening economic conditions across the country, which prompted the People’s Bank of China to reduce its one-year medium-term lending facility by 15 basis points to 2.50%.
The monetary easing measures followed higher deflation risks in July as well as default risks by key property developers, which impacted market sentiment.
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